Principles of Macroeconomics
Mock Exam
Course Introduction
Principles of Macroeconomics introduces students to the fundamental concepts, theories, and tools used to analyze the overall performance and structure of national and global economies. This course explores key topics such as gross domestic product (GDP), inflation, unemployment, economic growth, fiscal and monetary policy, and international trade. Through real-world examples and basic economic models, students will learn how economic indicators are measured and how policy decisions impact aggregate demand, aggregate supply, and the broader economic environment. The course provides a solid foundation for understanding current economic issues and offers insights into the ways in which economics informs public policy and everyday decision-making.
Recommended Textbook
Money Banking and Financial Markets 4th Edition by Stephen G. Cecchetti
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Chapter 1: An Introduction to Money and the Financial System
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Q1) Which of the following statements best describes financial instruments?
A)All financial instruments are a means of payment.
B)Financial instruments can transfer resources between people but not risk.
C)Financial instruments can transfer resources and risk between people.
D)Financial instruments can transfer risk but not resources between people.
Answer: C
Q2) In 2010, regulators of many nations agreed on a major update of internationally active banks known as:
A)Basel III.
B)the Fred-Bob Act.
C)the Gramm-Leach-Bliley Act.
D)the Dodd-Frank Act.
Answer: A
Q3) Central banks can improve the welfare of a society by doing all of the following except:
A)serving the interests of government rather than the public at large.
B)helping to promote economic growth.
C)focusing on keeping the overall level of prices stable.
D)helping to reduce the volatility of business cycles.
Answer: A
Page 3
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Chapter 2: Money and the Payments System
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Q1) One advantage of using checks over a debit card is:
A)checks can be replaced if lost or stolen, a debit card cannot.
B)the bank is responsible if someone steals your checks and uses them; this isn't the case with debit cards.
C)a cancelled paper check is the only generally accepted proof of payment.
D)the person has "float," meaning time between writing the check and depositing funds to cover it.
Answer: D
Q2) The amount of currency in the hands of the public is approximately what percentage of M1?
A)45%
B)25%
C)30%
D)90%
Answer: A
Q3) During what period was money a better store of value: 1960-1980 or 1990-2009? Explain.
Answer: The period 1990-2009.During the period 1960-1980, inflation often rose to more than 5 percent; during the period 1990-2000, it rarely did.
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Chapter 3: Financial Instruments, Financial Markets, and Financial Institutions
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Q1) Considering the value of a financial instrument, the bigger the size of the promised payment the:
A)less valuable the financial instrument because risk must be greater.
B)longer an investor has to wait for the payment.
C)more valuable the financial instrument.
D)greater the risk.
Answer: C
Q2) The information concerning the issuer of a financial instrument:
A)needs to be complete and closely monitored by the buyers of the instrument for change.
B)is somewhat non-standardized to minimize the cost of the instrument.
C)is usually standardized to the essential information required by the buyers.
D)is closely monitored by the buyers of these instruments for change.
Answer: C
Q3) What are some of the advantages of trading in decentralized electronic exchanges?
Answer: Customers can see the orders, the orders are executed quickly, trading occurs 24 hours a day, and costs are low.
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Chapter 4: Future Value, Present Value, and Interest Rates
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Q1) What is the monthly interest rate if you are asked to convert a 12 percent annual rate to a monthly rate (calculate to 4 decimal places)?
Q2) Explain why an investor cannot simply compare the size of promised payments from different investments, even if the interest rates and other risk factors are the same.
Q3) Interest rates that are adjusted for expected inflation are known as:
A)coupon rates.
B)ex ante real interest rates.
C)ex post real interest rates.
D)nominal interest rates.
Q4) A credit card that charges a monthly interest rate of 1.5% has an effective annual interest rate of:
A)18.0%
B)19.6%
C)15.0%
D)17.50%
Q5) Compute the future value of $1,000 at a 6 percent interest rate after three different lengths of time.Use 6, 10 and 20 years into the future.
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Chapter 5: Understanding Risk
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Q1) If an investment offered an expected payoff of $100 with $0 variance, you would know that:
A)half of the time the payoff is $100 and the other half it is $0.
B)the payoff is always $100.
C)half of the time the payoff is $200 and the other half it is $0.
D)half of the time the payoff is $200 and the other half it is $50.
Q2) If an investment will return $1,500 half of the time and $700 half of the time, the expected value of the investment is:
A)$1,250.
B)$1,050.
C)$1,100.
D)$2,200.
Q3) Systematic risk:
A)is the risk eliminated through diversification.
B)represents the risk affecting a specific company.
C)cannot be eliminated through diversification.
D)is another name for risk unique to an individual asset.
Q4) How are the decisions of government policy makers, such as the Federal Reserve, related to risk and an individual investor's portfolio?
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Chapter 6: Bonds, Bond Prices, and the Determination of Interest Rates
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Q1) Suppose there is a decrease in the price at which a bondholder sells her bond.In this case, the holding period return will:
A)increase, since yields and prices are inversely related.
B)decrease, since this lowers the capital gain.
C)be negative.
D)equal the coupon rate.
Q2) When the current yield and the coupon rate are equal, the bond is:
A)purchased at a discount.
B)purchased at a price that equals the face value.
C)a zero-coupon bond.
D)purchased at a price that exceeds its face value.
Q3) Fly-By-Night Inc.issues $100 face value, zero-coupon, one-year bonds.The current return on one-year, zero-coupon U.S.government bonds is 3.5%.If the Fly-By-Night bonds are selling for $92.00, what is the risk premium for these bonds?
A)8.7%
B)1.5%
C)5.2%
D)8.0%
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Chapter 7: The Risk and Term Structure of Interest Rates
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Q1) The risk spread:
A)is also known as the default-risk premium.
B)should have a direct relationship with the bond's price.
C)should have an inverse relationship with the bond's yield.
D)is always constant.
Q2) The paper-bill spread refers to the interest rate spread between commercial paper and Treasury bills with the same maturity.Is this a risk spread or a term spread? How do you expect the paper-bill spread is related to GDP growth? What is the intuition for this result? What does this imply about the yield curve?
Q3) What impact should an economic slowdown have on the risk structure of interest rates?
Q4) Under the expectations hypothesis, if expectations are for lower inflation in the future than what it currently is, the yield curve's slope will:
A)become more upward sloping.
B)become flat.
C)be negative.
D)be vertical.
Q5) Any theory of the yield curve must be able to explain what three general conditions?
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Chapter 8: Stocks, Stock Markets, and Market Efficiency
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Q1) Which of the following statements is not true?
A)A value-weighted index is a better index to use to reflect changes in the economy's overall wealth.
B)A price-weighted index is a better index to use to reflect the average change in the price of a typical share of stock.
C)The Dow Jones Industrial Average is a price-weighted index.
D)The S&P 500 is a price-weighted index.
Q2) Mutual funds are characterized by the fact that they all:
A)have the same management fee set by regulation.
B)require the same minimum investment of $10,000.
C)provide some degree of diversification.
D)provide the same degree of liquidity.
Q3) Which of the following is not a feature of common stock?
A)Stockholders receive regular fixed payments on their shares.
B)Stockholders have limited liability.
C)Stock holders are residual claimants.
D)Stockholders have voting rights.
Q4) Do the voting rights possessed by common stockholders ensure that managers and directors have the same objectives as stockholders? Explain.
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Chapter 9: Derivatives: Futures, Options, and Swaps
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Q1) If we have a stock selling for $95.00 and a call option for this stock has a strike price of $82.00 and an option price of $13.60:
A)the intrinsic value of the option is $0.60 and the time value of the option is $13.00.
B)the intrinsic value is $82.00 and the time value of the option is $13.60.
C)the intrinsic value of the option is $13.00 and the time value of the option is $0.60.
D)the intrinsic value is $0 since the option is out of the money.
Q2) With a call option, the option holder:
A)has the right to sell the asset.
B)has the right to buy the asset.
C)can buy or sell, it is their option.
D)can buy the asset but only after the date specified.
Q3) If the option holder is the individual with the options, why is anyone an option writer?
Q4) Suppose you purchase a call option to purchase General Motors common stock at $80 per share in March.The current price of GM stock is $83 and the time value of the option is $5.What is the intrinsic value of the option? As the expiration date approaches, what will happen to the size of the time value of the option?
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Chapter 10: Foreign Exchange
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Q1) Using a model of supply and demand for the dollar-pound market, where the horizontal axis is labeled quantity of British pounds, explain what happens when Americans have an increased demand for British automobiles.
Q2) The forward exchange rate:
A)is the rate at which foreign exchange dealers are willing to commit today to buying or selling a currency in the future.
B)is a synonymous term for the nominal exchange rate.
C)is the same as the spot rate.
D)is always above the spot rate since it carries greater risk.
Q3) The law of one price:
A)is based on arbitrage.
B)applies only to real goods and not financial assets.
C)can explain short-run exchange rates but not long-run exchange rates.
D)is a mathematical concept that is not useful in explaining exchange rates.
Q4) Considering the foreign exchange market, identify four causes for an increase in the supply of dollars.
Q5) Considering the foreign exchange market, specifically the market for U.S.dollars and British pounds, who is supplying dollars in this market?
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Chapter 11: The Economics of Financial Intermediation
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Q1) Two problems that arise from asymmetric information are:
A)adverse selection and diseconomies of scale.
B)moral hazard and the free-rider problem.
C)moral hazard and adverse selection.
D)the free-rider problem and adverse selection.
Q2) Is the conflict between a lender to a firm and the borrower/owner an example of adverse selection or moral hazard? Explain.
Q3) Life insurance companies usually offer a lower premium to non-smokers than the premium charged to smokers.Discuss first the potential for adverse selection and moral hazard and then ways the company can seek to reduce or eliminate these problems.
Q4) If information in a financial market is symmetric, this means:
A)borrowers and lenders have perfect information.
B)borrowers would have more information than lenders.
C)borrowers and lenders have the same information.
D)lenders have more information than borrowers.
Q5) If buyers cannot distinguish a good used car, worth $15,000, from a "lemon," worth $5000; explain what will happen to the market for used cars.
Q6) Why is it that financial intermediaries are so important in most economies?
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Chapter 12: Depository Institutions: Banks and Bank Management
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Q1) Considering the balance sheet for all commercial banks in the U.S., the net worth of banks is:
A)about 12% of total liabilities.
B)about 5 times total assets.
C)about the same as total assets.
D)about 4 times total liabilities.
Q2) A bank's Return on Equity (ROE) is calculated by:
A)dividing the bank's net profit after taxes by the bank's capital.
B)dividing the banks liabilities by the bank's capital.
C)taking the bank's assets plus the net profit after taxes and dividing this sum by the bank's capital.
D)dividing the bank's net profit after taxes by the sum of the bank's assets and its liabilities.
Q3) A bank's Return on Assets (ROA) is calculated by dividing:
A)the bank's assets by its net worth.
B)the bank's net profits after taxes by its assets.
C)the bank's net worth by its assets.
D)the bank's assets less its net profit after taxes by its net worth.
Q4) Why are U.S.banks prohibited from owning stocks?
Q5) What is the equation that reflects a bank's balance sheet?
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Chapter 13: Financial Industry Structure
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Q1) The Dodd-Frank does all of the following except:
A)sets out new rules for financial institutions and markets.
B)repeals the Glass-Steagall Act of 1933.
C)requires closer government oversight over key establishments called systemically important financial institutions.
D)sharply alters the authorities of the government agencies that govern the financial sector.
Q2) The Volcker rule in the Dodd-Frank Act does which of the following?
A)Creates a host of new agencies to streamline the regulatory process
B)Increases oversight of specific institutions regarded as a systemic risk
C)Introduces significant regulation of hedge funds
D)Forbids insured depositories from proprietary trading
Q3) In the early years of the Great Depression, 1929-1933:
A)over one half of all U.S.banks failed.
B)two-thirds of U.S.banks failed.
C)more than a third of all U.S.banks failed.
D)a little less than one-quarter of U.S.banks failed.
Q4) Evaluate the pros and cons of the repeal of the Glass-Steagall Act of 1933.
Q5) What is the basic difference(s) between term and whole life insurance?
Q6) In what way(s) can a pension plan be seen as the opposite of life insurance?
Page 15
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Chapter 14: Regulating the Financial System
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Q1) The payoff method used by the FDIC to address the insolvency of a bank is when the FDIC:
A)pays the owners of the bank for the losses they would otherwise face.
B)pays off all depositors the balances in their accounts so no depositor suffers a loss, though the owners of the bank may suffer losses.
C)pays off the depositors up to the current $250,000 limit, so it is possible that some depositors will suffer losses.
D)takes all of the assets of the bank, sells them, pays off the liabilities of the bank, in full and then replenishes their fund with any remaining balance.
Q2) Bank mergers require government approval because banking officials want to make sure that:
A)the merger will create a larger bank.
B)the merger will not create a monopoly.
C)the merged bank will be more profitable.
D)the merger will not result in regulatory competition.
Q3) Why is the financial industry inherently more unstable than most other industries?
Q4) Why might there be a trade-off between a bank's profitability and its safety?
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Chapter 15: Central Banks in the World Today
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Q1) In its role as the bankers' bank, a central bank performs each of the following, except:
A)providing loans during times of financial distress.
B)providing deposit insurance.
C)overseeing commercial banks and the financial system.
D)managing the payments system.
Q2) The Federal Reserve's policy regarding announcing its policy decisions has:
A)always been to announce it immediately; that was part of the original Federal Reserve Act of 1913.
B)only recently gone to immediate announcement; until 1994 these policy decisions were secret.
C)been to release the decisions immediately since its early failure at preventing the Great Depression.
D)changed so that now the Fed does not release its decisions publicly.
Q3) If governments operated like businesses, meaning their goal was to maximize profits, why would they likely never give up the power to print money to any other institution?
Q4) What are the specific objectives of most central bankers?
Q5) What do modern central bankers not do?
Q6) What are the operational components of central bank independence?
Page 17
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Chapter 16: The Structure of Central Banks: The Federal
Reserve and the European Central Bank
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Q1) Each of the Reserve Banks has a president who is:
A)appointed by the bank's board of directors but approved by the board of governors.
B)appointed by the board of governors but approved by the bank's board of directors.
C)elected by the commercial banks in their district.
D)selected from the Board of Directors.
Q2) The Federal Reserve Act explicitly requires that the Board of Governors represents each of the following, except:
A)commercial interests.
B)foreign interests.
C)financial interests.
D)agricultural interests.
Q3) The federal funds rate is the interest rate:
A)the Fed charges banks who borrow from it.
B)banks charge each other for overnight loans on excess reserves held at the Fed.
C)the U.S.Treasury charges banks that need emergency funds.
D)the FDIC charges banks that need to borrow from it to meet depositor demands.
Q4) In what ways do the regional Federal Reserve Banks influence monetary policy?
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Chapter 17: The Central Bank Balance Sheet and the Money
Supply Process
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Q1) The Fed sells German bonds to commercial banks.Which of the following best describes the impact on the Fed's and the Banking System's balance sheets resulting from this transaction?
A)The Fed's assets and liabilities increase, the banking systems assets and liabilities decrease.
B)The Fed's assets increase and its liabilities both increase.For the banking system, the value of assets and liabilities do not change, only the composition of assets changes.
C)The Fed's assets and liabilities do not change, only the compositions of the assets change.For the banking system, assets and liabilities increase.
D)The Fed's assets and liabilities both decrease.For the banking system, the value of assets and liabilities do not change, only the composition of assets changes.
Q2) The collapse of the Thai currency, the baht, was partially due to:
A)inaction by the Federal Reserve.
B)the European Central Bank.
C)information provided by the central bank of Thailand.
D)information not provided by the central bank of Thailand.
Q3) Why do most central banks publish their balance sheets so frequently?
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Chapter 18: Monetary Policy: Stabilizing the Domestic Economy
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Q1) Today, reserve requirements are:
A)set in a way that makes reserve demand highly unpredictable.
B)changed whenever the target federal funds rate is changed.
C)changed instead of making changes in the discount rate.
D)really not a direct tool of monetary policy.
Q2) Why is it necessary to distinguish between the target federal funds rate and the market federal funds rate?
Q3) Secondary credit provided by the Fed is designed for:
A)banks who qualify for a lower interest than what is available under primary credit.
B)banks that are in trouble and cannot obtain a loan from anyone else.
C)banks that want to borrow without putting up collateral.
D)foreign banks.
Q4) Could the Fed impact the amount of borrowing in the federal funds market without changing their target for the federal funds rate? Explain.
Q5) What are the advantages from the 2002 change in the Fed's lending policy?
Q6) We saw in Chapter 18 that many central banks have turned to a policy framework of inflation targeting.Discuss if this would be effective in a country experiencing deflation.
Page 20
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Chapter 19: Exchange-Rate Policy and the Central Bank
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Q1) A country with a fixed exchange rate policy and free cross-border capital flows that is experiencing an economic slowdown will find:
A)their central bank will reduce the domestic interest rate in order to fend off the slowdown.
B)their currency will depreciate to stimulate exports.
C)their corporate equities will become more attractive to foreign investors.
D)monetary policy in not available as an economic stabilization tool.
Q2) What were the contributing factors that led to Argentina's initial adoption of a currency board and then its subsequent failure?
Q3) The impact on the foreign exchange market for dollars resulting from the Fed selling euros will be:
A)a decrease in the demand for dollars.
B)a decrease in the supply of dollars.
C)an increase in the supply of dollars.
D)a decrease in the interest rate in the U.S.
Q4) How would the impact on the exchange rate differ if the Fed were to sell U.S.Treasury securities instead of selling an equal amount (in $ terms) of euros?
Q5) Is the European Monetary Union a form of dollarization? Explain.
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Chapter 20: Money Growth, Money Demand, and Modern Monetary Policy
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Q1) For the Fed to use money growth as a direct monetary policy target, which of the following needs to exist?
A)A highly variable deposit expansion multiplier
B)A stable link between the monetary base and the quantity of money
C)A predictable link between the quantity of money and the deposit expansion multiplier
D)A stable link between the monetary base and the quantity of money and a predictable relationship between the quantity of money and the rate of inflation
Q2) Based on the analysis of the equation of exchange, Irving Fisher, derived the quantity theory of money which states that:
A)velocity changes always offset changes in the supply of money.
B)changes in the aggregate price level are caused solely by changes in velocity.
C)changes in the aggregate price level are caused solely by changes in the quantity of money.
D)none of the answers given is correct.
Q3) Assuming a constant nominal GDP, would the velocity of M1 equal the velocity of M2? Explain.
Q4) Why do people hold money? Explain the reasons.
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Chapter 21: Output, Inflation, and Monetary Policy
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Q1) The debate over the causes of recessions in the U.S.in recent years has included arguments about:
A)monetary policy, but not higher oil prices.
B)decreases in exports.
C)higher oil prices, but not monetary policy.
D)both monetary policy and higher oil prices.
Q2) If the economy is producing a level of output that is consistent with the potential output level, and government purchases increase, describe what happens in terms of the long-run real interest rate, and why, to keep the economy at its potential output level.
Q3) In the long run, current output will:
A)equal potential output.
B)be less than potential output.
C)be above potential output.
D)only equal potential output if unemployment is zero.
Q4) Is the monetary policy reaction curve applicable only to central banks that have an explicit inflation target? Explain.
Q5) Why is it necessary to understand fluctuations in investment if we want to understand the fluctuations in the business cycle?
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Chapter 22: Understanding Business Cycle Fluctuations
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Q1) "Official" recessions in the United States are declared by:
A)the Federal Reserve.
B)the U.S.department of the Treasury.
C)the National Bureau of Economic Research.
D)Congress.
Q2) Opportunistic disinflation occurs when policymakers:
A)change the target inflation rate.
B)take advantage of positive supply shocks.
C)are able to permanently lower inflation.
D)all of the answers given are correct.
Q3) According to the NBER, a severe decline in economic activity that lasted less than two quarters:
A)could not be considered a recession.
B)could still be considered a recession.
C)would not be called a recession until more than two years had passed.
D)would immediately be called a recession.
Q4) What explanations have been offered to account for the Great Moderation?
Q5) What is meant by saying that automatic fiscal policy is countercyclical?
Q6) Does an increase in the rate of inflation always imply that aggregate demand is increasing? Explain.
Page 24
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Chapter 23: Modern Monetary Policy and the Challenges
Facing Central Bankers
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Q1) Changing short-term interest rates have a(n):
A)strong and immediate impact on household purchase decisions.
B)no impact on household purchasing decisions.
C)somewhat modest impact on household purchasing decisions.
D)none of the answers provided is correct.
Q2) All but which of the following is a reason policymakers are concerned about the strength of the rebound from the 2007-2009 financial crisis:
A)Banks would make credit expensive and difficult to obtain
B)Investors would be cautious about buying securitized assets
C)Households would prefer to save more and borrow less
D)The pace of technological change would slow
Q3) Increases in the real interest rate will result in a(n):
A)increase in net exports because it will lead to a depreciation of the dollar.
B)decrease in net exports because it will lead to a depreciation of the dollar.
C)increase in net exports because it will lead to an appreciation of the dollar.
D)decrease in net exports because it will lead to an appreciation of the dollar.
Q4) Identify at least three effects that could result when the central bank changes its balance sheet that can impact the economy.
Q5) Why can't the nominal interest rate be negative?
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